Stocks Are Jumping, And Traders Are Freaking Out About A Possible 'Melt-Up' In Markets

Stocks are jumping (up about 1%) and yet the VIX (which is a measure of volatility and fear) is also jumping.

This is odd, because usually the VIX goes up when markets are falling.

What gives?

Well it turns out that investors are fearful right now, but they're not fearful of a market decline.

Investors are afraid of a "melt higher." That's the opposite of a melt down.

Dave Lutz of Stifel, Nicolaus explains that a lot of options aren't priced for a big jump over the next two days, so if that were to happen a lot of traders would be caught short:

We are getting a lot of questions about the upside move in the VIX today, despite the spike higher in Equities. While there is certainly a valid argument that people are buying protection against this spike higher (Fade the “Tepper Rally”) – A lot of smart Volatility guys are telling me it’s actually due to fear of a “Melt Higher”.

If we jump 30 SPX handles in the next day or 2, those weekly and monthly SPX options are way too cheap – so we have people scooping them up. Remember – the VIX is a gauge of a move UP or DOWN….. Our Options department notes that the May 13.78 implies an daily average move of 86 bps from now until next Wednesday, when the May future expires. 86bp….

Here is what I cobbled together – please feel free to attack me, as my Public School education pales in comparison to the PhDs in Chicagoland… There is chatter that we may see a big announcement from Japan’s Abe on Friday on a Phase II growth strategy. Focused on corp tax cuts, deregulation, women in workforce, and investment policy – This could drive risk assets higher in the short-term.